Question

Suppose Alcatel-Lucent has an equity cost of capital of 10.9%, market capitalization or 9.35 billion, and an enterprise value or si 3 billion. Assume Alcatel-Lucent de cost and it maintains a constant debt-equity ratio. The firm has a project with average risk. Expected free cash flow, debt capacity, and interest payments are shown in the table: EEB a. What is the free cash flow to equity for this project? b. What is its NPV computed using the FTE method? How does it compare with the NPV based on the WACC method? capital is 6.6%, its marginal tax rate is 34% he WACC is 9.07%, a. What is the free cash flow to equity for this project? The froe cash flow lo equily for this projec is Round all answers to two decimal places. Use a minus signi to indicate a negative nunber.) Year FCFE (S million) Data Table (Click on fhe icon located on the top-right comer of the data table below in order to copy ts contents into a spreadsheet) Year -100 49.41 0.00 FCF (S million) 48 40.46 3.26 98 16.69 2.67 65 0.00 1.10 Interest Print Done

Answer 1

a). We can compute FCFE by adjusting FCF for after-tax interest expense [Interest x (1 - tc)] and net increases in debt (D_t - D_{t -1}).

Year	0	1	2	3
D	49.41	40.46	16.69	0.00
FCF	-100	48	98	65
After-Tax Interest Exp.	0	-2.15	-1.76	-0.73
Inc. in Debt	49.41	-8.95	-23.77	-16.69
FCFE	-50.59	36.8984	72.4678	47.584

b). NPV(FTE) = PV of cash inflows - PV of Cash Outflows

= [$36.90 / 1.109] + [$72.47 / 1.109²] + [$47.58 / 1.109³] - $50.59

= $33.27 + $58.92 + $34.88 - $50.59 = $76.49 million

NPV(WACC) = PV of cash inflows - PV of Cash Outflows

   = [$36.90 / 1.0907] + [$72.47 / 1.0907²] + [$47.58 / 1.0907³] - $50.59

   = $33.83 + $60.92 + $36.67 - $50.59 = $80.83 million

NPV(WACC) is more than NPV(FTE) because of lower discount rate.